These days, we face an uncertain economy, not only in America but across the planet. Yet, in a very real sense, speculators are the best thing that can happen to an economic recovery. Speculators will take risks the rest of us cannot afford, or stomach. And at a time when fear is afoot in the land, and people are struggling with a broken economy, speculators are the real “white knights” who pump liquidity into the economic recovery — in order to ride the next uptick into profits.



Like it or not, we are surrounded by speculation in an ever increasing complex globalized, internet connected, fast-paced world. That is a “good thing,” as Martha Stewart would say. When you understand that virtually every investment you make is really a speculation, you'll have more reasonable expectations, and a better handle on what you can expect.

If you choose to take some risk — and we encourage taking some risk — let it be rational, so that you don't overpay for something, or confuse an investment with what actually is a speculation, without being compensated sufficiently for taking that higher risk.

If you're looking for a place to put your money with dreams of a high return, first consider how “financial dementia” and the “herd mentality” have led to ruin for so many people throughout history— the most recent example being the real estate “bubble” of 2007 and 2008 and the resulting Wall Street meltdown. Learn how to spot the danger signs when something sounds too good to be true, so you won't read your own story the next time someone writes about a bubble that's burst.

How to speculate wisely

When Philip Carret wrote his classic book in 1930, The Art of Speculation, he said speculation was part of virtually all business transactions and that being a professional speculator requires special skills and knowledge. The observations he made over seven decades ago are still applicable today, such as his suggestion that “Successful speculation requires capital, courage and judgment.”

Carret described a level of expertise that would deem any speculator worthy of respect: “To be successful, then, the speculator must know a great deal more than merely enough of general conditions to determine the trend of the general market. He must be a student of values in individual securities. To appraise values in individual securities he must know something about a great many different businesses.”

Carret summarizes his book with Twelve Commandments for Speculators:

1) Never hold fewer than ten different securities covering five different fields of business.

2) Reappraise every security held at least once every six months.

3) Keep at least half your total fund in income producing securities.

4) Consider yield the least important factor in analyzing any stock.

5) Be quick to take losses, reluctant to take profits.

6) Never put more than 25 percent of a given fund into securities about which detailed information is not readily and regularly available.

7) Avoid “inside information” as you would the plague.

8) Seek facts diligently, advice never.

9) Ignore mechanical formulas for valuing securities.

10) When stocks are high, money rates rising, business prosperous, at least half a given fund should be placed in short-term bonds.

11) Borrow money sparingly and only when stocks are low, money rates are low or falling, and business depressed.

12) Set aside a moderate proportion of available funds for the purchase of long-term options on stocks of promising companies whenever available.

Speculate for gain, invest for safe returns

Investment is about putting your money in an opportunity with a safe, guaranteed return. And as we've seen in the news there aren't too many of those in our world. Examples are few: U.S. Treasury debt securities, federally insured bank deposits, and fewer than five nonfinancial corporations with bonds rated AAA by Standard and Poor's.

And even if these are considered the safest investments in the world today, no one can be assured that they will stay that way until hell freezes over (remember what has happened to General Motors, once the bluest of Blue Chips, and more recently Bear Stearns).

In contrast, speculation is about taking calculated risks, using your experience, shrewdness and a keen awareness that even getting your principal back isn't cast in stone — much less earning what you expect as a return.

Look at it this way: You've got to take your shot if you want to reach your monetary goals. But please let your rational brain run the show. If you let your emotions drive your desire to become rich, or give in to the herd mentality, you'll be gambling — and that is not the path you want to take.

(Article reprinted with the permission of the authors, Jose D. Roncal and Jose N. Abbo)